Sweet 16 Update - July 29

[dan_s]

During the week ending July 28, the Sweet 16 gained 4.82% and it is now up 6.34% YTD.
The S&P 500 Index also gained 1.19% during the week and it is now up 19.34% YTD.

Fear of Recession is fading, which takes a lot of pressure off of the oil price. The front month NYMEX contract for WTI (SEP23) closed at $80.67/bbl and I think there is good chance that it moves over $90/bbl by the end of Q3. With Saudi Arabia and Russia now cutting oil exports the OECD Petroleum Inventories will be falling hard with declines accelerating in September. Per Raymond James energy sector team, OECD inventories (crude oil and refined products) will go as low as 22 Days of Consumption within 3 months. OECD inventories HAVE NEVER BEEN THAT LOW. Based on the historical relationship with oil prices, WTI might need to go over $120/bbl to lower demand for transportation fuels.

Diesel inventories are a major concern as they are 14% below normal in the U.S. < This country's economy runs on diesel.

If you've been following my posts, you know that I am worried that U.S. natural gas prices will drift lower unless we see several weeks in a row of storage builds below that are significantly below the 5-year average. We have plenty of storage capacity to add another TCF of natural gas to U.S. storage, but it looks like storage heading into the 2023/2024 winter will be more than 500 Bcf higher than last year. When the utilities that pump natural gas for space heating to your home or business believe they have enough supply in storage and/or under firm contracts, they will pull out of the futures market. When the Paper Traders get caught with too many long contracts, we can see big dips in the futures market. The long-term outlook for natural gas prices in the U.S. remains very bullish.

Six of the Sweet 16 released Q2 results and updated guidance last week.

> Antero Resources (AR): AR had the most disappointing results. I have lowered my valuation by $2.00 to $27.50. Lower for longer NGL prices are my big concern. AR has a strong balance sheet and they have assured the market that they will adjust their drilling program to stay within operating cash flow.

> EQT Corp. (EQT): I lowered my valuation by $3.00 to $42.00. I rate it a HOLD for now, but the long-term outlook is very promising. EQT is the largest producer of natural gas in North America.

> Range Resources (RRC): I lowered my valuation by $0.75 to $30.25. Great company with a lot of upside when ngas prices rebound in 2H 2024. EQT and RRC are actually leading the Sweet 16, both are up 24.98% YTD. Might be time to harvest those gains and move the money to companies more heavily weighted to oil.

Company's more heavily weighted to oil:

> Cresent Point Energy (CPG) reported strong Q2 results. I am holding my valuation at $13.00, but I think it has 50% upside for us by year-end.

> Matador Resources (MTDR) continues to report strong production growth and it has lots of high-quality "running room". I have increased my valuation by $1.50 to $83.50. Matador is one of the most "Aggressive Growth" companies in the Sweet 16. We will be publishing an updated profile on MTDR on Monday.

> Ovintiv (OVV), which used to be named EnCana, reported outstanding operational results so I have increased my valuation by $3.00 to $65.00. Their free cash flow should increase significantly over the next two quarters. The balance sheet should be in good shape by year end, so it deserves a higher valuation multiple.

Sweet 16 that are reporting Q2 results next week after the markets close:
July 31: CRK
Aug 2: CPE, MGY, NOG, SM
Aug 3: EOG
Aug 4: PR, SBOW

Five of the Sweet 16 still trade below book value, which is nonsense for profitable companies of this quality: CPE, CPG, ESTE, VTLE, SBOW

SilverBow Resources (SBOW) has been getting some long overdue "love" and it is now up 23.16% YTD. It still has 80% upside to my valuation of $63/share. Investors expect them to report a big increase in their oil production during Q2.

If WTI does push over $90/bbl this could be the strongest 2nd half of the year for the Sweet 16.